You’re Going to Want to Take Advantage of This (Part 2)…
In Friday’s issue, I showed you a simple strategy for trading a stock before its big earnings announcement.
Today, I’ll reveal how you can profit – even if the stock doesn’t move the way you want it to following its earnings announcement.
You’ve already used our earnings straddle trick. Now, after the announcement and the market has moved, you simply drop the loser and ride the winner.
If the numbers are flat, close out the whole play with a minimal loss of time value because you only had the position for a week and more than 60 days until expiration.
The time decay will be minimal for the deferred option months in comparison the front month gamble for all-or-nothing winnings.
Typically, options become more expensive as the earnings release approaches as buyers get more fearful of a surprise. To avoid a chunk of the increased volatility, enter into the straddle at least a week prior.
Important Rules to Remember:
- Play both sides with at-the-money options. The total cost of the Straddle (Call and Put) needs to be less than 10% of the value of the stock.
- Buy more time until expiration than you may need (at least two or three months for the trade to develop). Time is your greatest asset when you have completely limited the exposure risks.
- After earnings, exit the option opposite the breakout move and manage the trend with the winner. The expiration option trade breakeven is the strike plus and minus the option premium total.
These breakeven thresholds should be less than 10% above and below the current share price with earnings data a possible catalyst for a multi-month breakout.
If nothing big happens in the stock, sell your straddle to close out and only lose a bit of time value since the options still have months until expiration.
It’s as simple as that.
Keep it In the Money,
Trading Tip of the Day: You Don’t Have to Gamble…
While long-shot gainers are certainly exciting, they’re not the most sustainable way of trading.
Sure, seeing huge returns is great. But stacking up smaller wins can be just as profitable over time… Usually even more so!
The keys to a sustainable trading strategy are consistency and simplicity. You want to make sure your strategy is repeatable.
Regardless of what your strategy involves, focus on what’s working and remove the parts that aren’t.
By doing this you can ‘trim the fat’ off your strategy until you have an efficient method of booking gains that you know inside and out.
And now that you have a strategy that works and you understand fully, you can put your energy into repeating positive results.
Bottom line: simplicity and consistency will help light the path to a rock solid strategy.
— Greg Guenthner